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The Peace Dividend: Military Spending Cuts and Economic Growth

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  • Mr. Malcolm D. Knight
  • Delano Villanueva
  • Norman Loayza

Abstract

Although conventional wisdom suggests that reducing military spending may improve a country’s economic growth performance, empirical studies have produced ambiguous results. This paper extends a standard growth model and estimates it using techniques that exploit both cross-section and time-series dimensions of available data to obtain consistent estimates of the growth-retarding effects of military spending via its adverse impact on capital formation and resource allocation. Model simulations suggest that a substantial long-run “Peace Dividend”--in the form of higher capacity output--may result from: (i) markedly lower military expenditure levels achieved in most regions during the late 1980s; and (ii) further military spending cuts that would be possible in the future if a global peace could be secured.

Suggested Citation

  • Mr. Malcolm D. Knight & Delano Villanueva & Norman Loayza, 1995. "The Peace Dividend: Military Spending Cuts and Economic Growth," IMF Working Papers 1995/053, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1995/053
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    More about this item

    Keywords

    WP; spending; estimate; ratio; country; military spending; rate of growth; simple average; panel estimate; resource allocation; research and development expenditure; country group; regression equation; standard deviation; investment ratio; estimation work; growth model; Defense spending; Capacity utilization; Production growth; Human capital; Trade barriers; Western Hemisphere; Middle East; Eastern Europe; North Africa; Sub-Saharan Africa;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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